Is It worthy:Beijing Backs Derivatives Fights
China’s government agency，SASAC , announced to support state-owned companies challenging foreign banks over huge losses from derivative deals, some bankers and analysts worry about the risks of dealing with these China’s enterprises for that kind of “official support”.
All most all China’s airlines and shippers lost over billions dollars in trading in oil derivative since the price of oil plunged last year. Certainly, either many other investors made wrong decision when global oil price soared and crazy CEOs and CFOs got out of control in their portfolios.
“”The move is a very normal action for enterprises to use legal tools to protect their deserved rights in commercial activities,” said in SASAC statement delivered on Monday. SASAC are charged in 150 major stated-owned enterprise.
Bankers in HK started to realize Beijing might challenge the fuel-derivative losses and trying to discuss how to impose stiffer collateral requirements for Chinese airlines and other companies that seek derivative contracts.
In early August, China Easter Airlines Corp. Air China Ltd. and China Ocean SHipping Co. sent letters to six international investment banks waring that certain transactions “may be void, invalid or unenforceable”
The statement from China government is startling, delivering a cear message the government is actively encouraging Chinese state-owned companies to cut their losses by taking various actions, including legal actions”.
Through a series financial activities recently, there is a strong signal China is trying to exert its influence in foreign financial markets. This must be an inevitable step in the process of stepping into commodities financial market.
Chinese leaders are concerned that state-owned companies, stepping outside the protective walls of the government-planned economy in search of natural resources overseas to power their rapid expansion, are easy targets for globally savvy resources suppliers and financial institutions.
The SASAC highlighted in its statement that it is investigating the oil contracts in order to “safeguard state assets,” while noting the “risks and complexities” in some contracts that make them difficult to understand.
When financial markets have tripped up state companies in the past, Beijing has sometimes sought to distance itself from obligations.
Five years ago, a Chinese trading firm in Singapore lost $550 million on trades in fuel contracts. Shortly afterward, the SASAC and the trading firm’s parent company, state-owned China Aviation Oil Holding Co., issued statements saying any losses were the fault of the Singapore subsidiary and called on counterparties to be “realistic” in their expectations of repayment.
About two years ago, the Chinese company settled its claims, paying less than estimates of the initial losses, a lawyer involved in the case said Monday.
Monday’s government statement reiterates warnings that Chinese companies are permitted to enter derivative contracts only to hedge, or protect themselves from swings in commodity prices, and not to speculate. The policy is backed up by numerous rules, which bankers said could be tightened further.
Some in the industry believe that foreign banks will face pressure to offer derivatives through domestic Chinese financial institutions, presumably so their activity could be better monitored by Beijing. Already, China has made vigorous efforts to bring more such activity onshore through Chinese commodity markets and over-the-counter trading regulated domestically.
Financial policy makers in China say government leaders often don’t grasp how derivative products work and then react angrily when deals backfire.
Mr. Wang at Freshfields said the recent events highlight the need for foreign institutions to ensure that Chinese entities have necessary authorization to enter a deal, since legal challenges are often grounded in an argument that the deals weren’t permitted or were too complex. Also, contracts should specify that disputes will be settled via international arbitration, since China won’t typically enforce foreign court decisions.
